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Congress Considers Permanent Ban on Internet Tax

April 20, 2005

Telephone Excise Tax • Mistakes Abound on Telephone-Tax Refund Requests • One-Time IRS Credit for Telephone Tax • Feds Surrender, Kill 108-Year-Old Telephone Tax • Congress Considers Permanent Ban on Internet Tax • Taxes, Fees & Regs Add 18% to Cell Phone Bills --- Spanish-American War Drawing: Library of Congress

More than 100 years ago, Congress levied a federal excise tax on phone service to pay for the Spanish-American War. Consumers are still paying it, but a bill introduced in Congress would prevent the tax from ever being extended to the Internet.

The Federal Excise Tax on Communications (FET), is currently applied to all local and long distance telephone service. The bill, sponsored by Sen. George Allen (R-VA), Sen. Ron Wyden (D-OR) and Rep. Chris Cox (R-CA), effectively "walls off" the Internet from any attempts to apply the FET, which currently is 3 percent but has been higher throughout its long history.

"The principle of the Federal Internet Tax Prohibition is to make the Internet remain as accessible as possible to all people in all parts of our country, forever," Allen said.

The legislation called "The Federal Internet Tax Prohibition Act of 2005" is partly in response to a report by the Congressional Joint Committee on Taxation (JCT) which asked in January whether the Federal Excise Tax should be applied to all Internet communications including e-mail, Voice Over IP, internet video conferencing and other data traffic.

In December, President Bush signed into law the Internet Tax Moratorium bill which prohibited three types of local and state access taxes, but it is scheduled to expire in 2007. The new legislation not only makes the moratorium permanent, but also prohibits multiple taxation by two or more states on products or services purchased online, and rules out taxes that treat online purchases differently from other types of sales.

Allen said it's important for Congress to act to prevent federal, state and local governments from piling up new taxes on the Internet as an easy source of revenue. Expanding the tax, he said, would hinder the investment and deployment of broadband services and would impact economic growth of small businesses especially in smaller towns and rural areas.

"The Internet Tax Freedom law has created a level playing field, stopping unfair and discriminatory tax schemes that would wall off the Internet to many Oregon consumers and make e-commerce impossible for Oregon business owners," said Wyden. "Internet users and entrepreneurs who breathed a sigh of relief at this law's extension should have the security of knowing its protections will never go away."

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